How do hard money lenders use ARV, and what is the 70% rule?

Two different 70s that people mix up

Investors say "seventy percent" so often it sounds like a password. There are really two different ideas hiding behind it.

The lender's 70. Lima One, a private lender, explains that most fix-and-flip lenders will lend up to a certain percentage of the ARV, and calls 70% the standard maximum. Loan-to-ARV is simple math: the loan amount divided by the ARV. Their example is a $175,000 loan on a $250,000 ARV, which is exactly 70%.

The investor's 70. The 70% rule, as BiggerPockets explains it, says an investor should not pay more than 70% of the ARV minus the repairs needed. It is a way to decide what to offer.

One limits the loan. The other limits the purchase price. Both lean entirely on one number, the ARV. If that number is wrong, everything built on top of it is wrong too, just with more decimal places.

How the 70% rule math works

BiggerPockets uses this example:

• ARV: $150,000
• $150,000 x 0.70 = $105,000
• Repairs: $20,000
• $105,000 minus $20,000 = $85,000 maximum purchase price

The 30% that gets carved off is not all profit. It has to cover carrying costs like interest and points, selling costs like commissions, closing costs and title insurance, plus the surprises. Every flipper has opened a wall and found something that was not on the bid.

BiggerPockets is also clear that 70% is a guideline, not a hard-and-fast rule. The article says that in California the figure could go as high as 80% or 85%, and that lower-priced housing may call for a deeper discount, such as 65%. A landlord planning to hold the property may be able to pay more than a flipper who has to sell and pay agents. The percentage bends with the market and the exit plan.

The 70% rule is not an appraisal method

This is where I get to be the fun one at the party. The 70% rule tells you what you should pay. It says nothing about what the house is worth.

An appraiser does not back into value from a profit target. The ARV in an appraisal comes from comparable sales (comps) of homes that are already in the condition yours will be in after the work. Lima One describes ARV the same way: an estimate of what the home will be worth once the rehab is done, based on the planned work and recent sales of similar nearby homes.

So if a deal only pencils at a $600,000 ARV, and the renovated sales nearby top out at $540,000, the deal does not pencil. Hope is not a comp. Neither is the Zestimate after you show it photos of the kitchen you plan to build.

And I am measuring what the market pays for the finished product. Buyers react to condition, so a fully renovated older house can outsell a newer one that was never touched. That is often the whole reason a flip works. But the premium has to show up in real sales, not in the pro forma.

How a lender actually uses the ARV

For the lender, the ARV sets the ceiling on risk. If the loan stays at or under the lender's loan-to-ARV limit, there is a cushion between what is owed and what the finished house should sell for. Lima One describes going above about 70% as too risky for the lender.

That is why private lenders order an ARV appraisal instead of taking the borrower's spreadsheet at its word. Each lender has its own overlays and terms, so the exact percentage, how draws work, and what reports they want will vary. Ask your lender for their numbers before you write an offer, not after.

A practical tip: run the 70% rule and the lender's loan-to-ARV side by side. If your purchase price fits the rule but your loan request blows through the lender's cap, you will be bringing more cash to closing than you planned.

What to do before you make an offer

1. Pull renovated comps, not average comps. Look for sales of homes in finished condition close to what your plan will produce.
2. Check how recent they are. A hot market from last spring is not this month's market. Test the most recent window the data supports.
3. Write a real scope of work. Line items, finishes and a budget. Vague scopes produce vague ARVs.
4. Run the 70% rule as a screen. Then adjust the percentage for your market, your costs and your exit.
5. Get your lender's loan-to-ARV limit and do the math on your actual loan request.
6. Stress test it. Lower the ARV a bit and raise the repairs a bit. If the deal dies, it was never alive.

What I see in the field

I do ARV work for private lenders, and the gap I see most is not bad math. It is optimistic comps. The borrower pulls the best sale in the zip code, a house with a view and a bigger lot, and calls that the ARV.

A good ARV report shows its work: the renovated sales, why each one fits, and what was adjusted and why. When the report teaches the market, the investor can see why the number landed where it did and plan the next deal better. Facts over feelings works for flippers too. It just saves them more money.